Background Information:
Suppose the existing firms in the fastfood restaurant business are currently earning a negative economic profit in the short run.
a. Draw a properly labeled graph representing a monopolistically competitive firm in this situation. Identify the price of the good and the quantity of output the firm produces in the short run, and identify the area that represents the firm’s economic profit.
b. Explain what you anticipate will occur in the long-run in this industry. How will the industry price and quantity produced change in the long-run? How will the firm’s profit change in the long-run?
c. Draw a graph representing the monopolistically competitive firm in long-run equilibrium. Identify the price of the good and the quantity the firm produces in the long-run. What is the relationship between price and marginal cost in the long run? What is the relationship between price and average total cost for this firm in the long-run?
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